3/23/2011 @ 9:44AM33,265 views

Special Report: Inside Baseball's Debt Disaster

Across the country in Los Angeles, Dodgers owner Frank McCourt faces an equally messy legal battle. In 1977 he founded the McCourt Co., a Boston-based commercial real estate firm that specialized in parking lots. Two years later he married his college sweetheart, Jamie Luskin. As McCourt’s business thrived, he hungered for a Major League Baseball team. In 2002 McCourt made an unsuccessful bid for the Boston Red Sox. A year later he looked over the Los Angeles Angels of Anaheim. Finally in 2004, when Rupert Murdoch’s Fox Entertainment Group wanted to get rid of the Los Angeles Dodgers, McCourt realized his dream.

He didn’t have to spend much of his own money to do it. The sale price for the ball club and its stadium in Chavez Ravine was $430 million. McCourt borrowed all but $9 million of the purchase price, an unusually large amount of financing. That sum included a $196 million loan from Fox, which used one of McCourt’s South Boston parking lots as collateral. (Fox later sold the lot for $205 million.)

Major League Baseball approved the deal, apparently believing McCourt would eventually work his way out from under the load. And under McCourt the Dodgers have had healthy returns. Last year revenues were an estimated $246 million (net of revenue sharing) and operating income was $32.8 million. FORBES estimates that the Dodgers’ value has nearly doubled to a current $800 million under his ownership. But the debt increased, too, and now stands at 13 times Ebitda, a problem that came to light in late 2009 when Jamie McCourt filed for divorce.

The central issue in the divorce is the Dodgers. Frank contends that the team is solely his. Jamie believes they are a shared asset. The trial is currently on break, and there is no new court date scheduled. It may not be taken up again until early next year, and how it will end is anyone’s guess. But what’s clear from the court documents is that Frank McCourt used the team as collateral to rack up $459 million in debt from 2004 to 2009.

Over that period McCourt took $108 million of the money in personal distributions and funneled it into the couple’s real estate purchases. It also “supported the couple’s very expensive lifestyle,” says David Boies, the superlawyer representing Jamie. The McCourts bought eight houses across the country, including a $28 million Malibu mansion. (A house in Cabo San Lucas was sold last year.) In 2006 McCourt turned two of the stadium’s parking lots into a separate company, then took a $60 million loan against it. He used $12 million of that on the team and took the rest of the money, court documents say. According to Raman Sain, a principal at accounting firm Holthouse Carlin & Van Trigt, who studied the McCourt’s legal documents on behalf of the Los Angeles Times, Frank McCourt borrowed $23 million against the team in 2008 and $8.5 million in 2009.

Steve Sugerman, Frank McCourt’s spokesman, insists that the team is not financially desperate and is in no danger of falling into bankruptcy. But according to Sain, in 2009 every dollar in free cash the Dodgers earned “was used to make payments on the interest on the debt,” not the principal. (The Dodgers dispute this.) It doesn’t help that many of the Dodgers’ deferred player salaries, like the $20 million still owed to former outfielder Manny Ramirez, are coming due. One way for the team to dig itself out of the hole is by renegotiating its cable television rights, currently owned by Fox, which pays them over $30 million a year, and are due to expire in 2013. The NBA’s Los Angeles Lakers recently landed a reported 20-year, $3 billion agreement with Time Warner Cable. The Dodgers could expect at least that much in a similar deal. But the McCourts’ divorce proceedings have left the team’s leadership in limbo.

The McCourts’ financial statements since 2009 have not been publicly available. Boies says the team has added “tens of millions of dollars” in debt since then, but not, apparently, as much as Frank McCourt would have liked. Though the Dodgers say they have paid back all debt accrued since 2009, in the last two years the team has been turned down for loans from Citibank and the founder of the TV infomercial company Guthy-Renker. A possible business venture with Chinese investors, which would have added some cash to the larder, fell through. Last year the Dodgers took an undisclosed cash advance from cable partner Fox. And in February the Dodgers requested a $200 million loan from Fox—using the team’s next four years of cable rights as collateral. Selig did not approve it.

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Complicating things for the Mets is the fact they already have tapped the big new revenue stream many teams (and colleges like Texas and the BIg Ten) have found – their own TV network. At least the Dodgers could go that route, since subscriber valuations on cable systems appears pretty high, right?

fatjimmy: Our figures are all for 2010 and there were no 2010 financial statements leaked. There are many ways to calculate revenues. One big difference between our revenue numbers and those leaked on Deadspin is how revenue sharing is treated. We subtract revenue sharing from revenues for the payers and add it to revenue for the receivers. Playoff and merchandise revenues can also be figured on a gross or net level which can cause some differences. Our profit figures are all before interest, taxes and depreciation, but include the share of money teams get from things like MLBAM which in the leaked docs is not included in EBITDA.

So this is a lot of “So and so at Nike screwed up once in 2003 and let slip that they pay MLB $200mm/year in licensing fees” added up and extrapolated year to year. I’ve read a few reporters who say you just make these numbers up to sell magazines. How confident are you guys in your numbers?

So there are at least two debt fueled zombie teams plus one that has already gone bust.

How many others are there?

REALISTICALLY SPEAKING, the whole concept… the ridiculously huge amounts of money being spent for all the teams, the players, the stadiums, seems completely unsustainable. Much like the housing and Internet bubbles.